A budget deficit occurs when a country, business, or an individual has spending that is greater than the revenue they receive over a specific period—usually measured as a year. When spending exceeds revenue—or income—it's called deficit spending. On a government-level, the national debt is the accumulation of each year's deficit. For a business or individual, this would be their total debt.
When the revenue exceeds the spending, it creates a budget surplus. A surplus will reduce debt.
How the Deficit Affects the Debt
The U.S. Treasury must sell Treasury bonds, bills, and notes to raise the money to cover the deficit and fund regular government operations. This type of financing is known as public debt since these bonds are sold to the general public. Treasury debt is considered one of the most secure investments in the world because these debt securities have the backing of the U.S. government.
In addition to the public debt, the government regularly loans money to itself. This intragovernmental debt is in the form of Government Account Series securities. Most of these funds come from the Social Security Trust Fund.
That happened in the past when payroll taxes provided more than enough income to cover all Social Security benefits and the pot of funds grew. That's because there were more seniors working than there were retirees pulling benefits. However, as the number of seniors retiree grow, there need to be enough younger workers paying the taxes needed to cover senior benefits.
When there is a greater demand for outgoing funds for retirees then an inflow of funds from worker's taxes, the Social Security payments will add to the deficit and the debt. To avoid this, one of three things must happen.
- Payroll taxes must be raised
- Benefits must be lowered
- Other programs must be cut
Legislators continue to debate the best solution.
How the National Debt Affects the Deficit
The national debt will affect the budget deficit in three primary ways. First, the debt gives a better indication of the true deficit each year. You can more accurately gauge the deficit by comparing each year's debt to the previous year's debt. That's because the deficit, as reported in each year's federal budget, does not include all of the amount owed to the Social Security Trust Fund borrowed during the use of intragovernmental funding through the issuing of Government Account Series securities. That amount owed is called off-budget.
Second, the interest due on the Treasury bonds, notes, and bills and other government borrowing adds to the deficit each year. About 1.7% of GDP goes toward debt interest payments. Interest on the debt hit a record in FY 2019, reaching $575 billion. That beat its previous record of $523 billion in FY 2018. In the FY 2013 budget, the interest payment dropped to $416 billion.
Third, the debt decreases tax revenues in the long run, which further increases the deficit. As the debt continues to grow, creditors become concerned about how the U.S. government will repay any funds it owes. Over time, creditors may claim the deficit increases their risk if they buy Treasury debt products. They may demand higher interest rates to offset any perceived increased risks. Raising those rates may dampen economic growth.
For perspective, the U.S. national debt exceeded $22 trillion on Feb. 11, 2019. That's more than triple the nearly $6 trillion debt in 2000. As of December 2021, U.S. national debt exceeded $29 trillion.
How Debts and Deficit Spending Affect the Economy
Initially, deficit spending and the resultant debt will boost economic growth, especially if the country is in a recession. Deficit spending increases the amount of money in the economy. Whether the money goes to jet fighters, bridges, or education, it ramps up production and creates jobs. In the long run, debt can damage the economy because of higher interest rates.
Not every dollar creates the same number of jobs. For example, military spending created 8,555 jobs for every $1 billion spent in 2005. That's less than half the jobs created by $1 billion spent on mass transit. For that reason, the military is not the best unemployment solution.
Other issues occur if the U.S. government lets the value of the dollar fall. One effect is that the debt repayment will be in cheaper dollars. As this happens, foreign governments and investors become less willing to buy Treasury bonds, which forces interest rates even higher.
Presidential Impact on the Deficit and Debt
The president can reduce the deficit by spending only the collected revenue instead of issuing new Treasury debts. As a result, looking at debt by president provides a better gauge of government spending than deficit by the president.
- For example, President Barack Obama added $8.6 trillion to the debt and his total budget deficits totaled $8.9 trillion.
- Similarly, President George W. Bush's stated budget deficits totaled about $2 trillion. But he added about $5 trillion to the debt.
Having said that, the presidents with the highest deficits are still the presidents who contributed the most to the debt.